AFT1083: Microeconomics Case Study, UMK, Malaysia Refined sugar producer MSM Malaysia Holdings Bhd’s profitability may be affected if the new government lowers

CASE STUDY 1: Price Ceiling of Sugar

Refined sugar producer MSM Malaysia Holdings Bhd’s profitability may be affected if the new government lowers the ceiling price of refined sugar. According to CIMB Research, the new administration may review the existing ceiling price in view of the lower raw sugar prices. This is in line with Pakatan Harapan’s election manifesto which aims to alleviate the rising cost of living.

Currently, the country’s ceiling retail price of refined sugar is RM2.95 per kg. In March last year, the price was raised by 11 sen per kg, given the then sharp rise in international raw sugar prices to US$0.186 per pound. CIMB Research also said that MSM is expected to record a better financial performance in its second quarter of the financial year 2018 (2Q18), following a weak start to the current financial year.

“MSM turned around to report a core net profit of RM16mil in 1Q18, due mainly to lower raw sugar costs. However, the group was not able to fully capture the benefits of the lower raw sugar costs during the quarter, as it had locked in its raw sugar at 14 US cents to 15 US cents per pound, which is higher than the average international raw sugar price of 13 US cents per pound.

“This led to a lower-than-expected profit margin and a 1Q18 core net profit that made up just 14% of our full-year forecast and 12% of the consensus number,” said the research house in a note, while maintaining its “reduce” call on MSM. Target price-wise, it was lowered to RM2.77 from RM2.89 previously.

However, CIMB Research projected challenging earnings prospects for the refined sugar producer in the second half of the financial year 2018. This expectation was on the back of higher depreciation and interest expense costs relating to its new sugar refinery in Johor, which is due to come on stream in end-June 2018.

Meanwhile, MIDF Research said that MSM’s profit margin is anticipated to recover in 2018, given the soon-to-be-completed refinery plant in Johor, which would further drive the production cost lower. “We view that the lower international sugar price and stronger ringgit will keep the cost of raw sugar at bay.

“This will also allow MSM to pass down some of the cost savings to its customer, possibly leading to recovery in domestic sales volume. “We are also positive on the new government’s commitment to curb sugar smuggling and abolish refined sugar import permits,” it said. MIDF Research has reiterated its “neutral” call on MSM, with a lower target price of RM3.86.

Questions

• Using a diagram, illustrate the effect of the issues.
• Explain the factors that affect the price of sugar.
• Give your opinion about the issue.

CASE STUDY 2: “Have floor prices for flights too, not just ceiling fares”

Tourism and Culture Minister Nazri Aziz says the proposed capping of seasonal increases of airfares will be good for tourism but adds there should also be a limit on how low the fares should be. “If you put a cap on how high prices can go, then it’s good for tourism. But the floor price should be capped too,” he told a press conference today in commenting on a Malay Mail report that the Malaysian Aviation Commission was considering allowing airlines to increase domestic flight airfares by only 2.5 times the average fares during peak seasons.

Nazri said some airlines offered airfares that were too low, to the point they affected other airlines. “Sure, cheaper flights are good for competition and tourism, but the prices can’t be ridiculously low. “In business, new players may try to get ahead of the competition by dropping their prices, and once their competition is out of business, they then raise their prices.”

Previously, Deputy Transport Minister Ab Aziz Kaprawi said the Malaysian Aviation Commission (Mavcom) would be tasked with drafting proposals by June for airfares during festive seasons, but former Malaysia Airlines CEO, Abdul Aziz Rahman cautioned against this, saying the rates were best decided by the market.

Questions

• Using a diagram, illustrate the effect of the issues.
• Using a diagram, explain the effect if the price decreases.
• Give your opinion about the issue.

Answer

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